Protocol Fee Controller policy on incentivized composability pools

Sub DAOs Protocol Fee Controller
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Established in Proposal 629, the Protocol Fee Controller subDAO was given the scope of setting overrides for the default Taker Fee on Osmosis for asset pairings.

The proposal restricted these overrides to 0 or 20% of the default (0.02%).

So far, the Protocol Fee Controller group has settled on the methodology of setting Taker fees as follows:

  • Liquid Staked Tokens paired with base asset (e.g. stATOM/ATOM): 0.02%
  • Yield Bearing Derivatives paired with base asset (e.g. yieldETH/ETH): 0.02%
  • Leveraged Derivatives paired with base asset (e.g. sqOSMO/OSMO): Default
  • Stablecoins, same denomination, different issuer (e.g. USDC/USDT): 0.02%
  • Stablecoins, different denomination, different issuer (e.g. USDC/SILK): 0.02%
  • Stablecoins, same denomination, same issuer (e.g. USDC/USDC.axl): 0%

The Protocol Fee Controller group is currently discussing adding 0.02% to another subset of pools, the USDC.axl/USDC and USDT.axl/USDT pools, which are currently in the final category with 0% taker fees.

WBTC.axl/WBTC also meets these terms. However, this is currently the main source of Osmosis-issued WBTC for users, and setting a taker fee here is counterproductive to the adoption of this asset.

The rationale for adding a small taker fee is that these composability pools are the only incentivized pools that do not generate taker fees by which to offset the cost of incentives to the protocol.

Setting small incentives causes a functional amount of liquidity to arrive or remain in the pool without volume.
This, in turn, allows volume to pass through the pools, encouraging the concentration of liquidity to capture more swap fees.
As the volume increases, the incentives are offset by the taker fees and are no longer needed as the pool becomes self-sustaining.
While a pool is in the bootstrapping phase and requires incentives, a small taker fee of 0.02% will be applied. This fee will not be likely to impact volume, as the route must exist for the composability of popular assets.

Overall, this is a change in the Protocol Fee Controller group’s policy, which would require that any pairing that receives OSMO incentives also return value to the protocol directly, minimizing the usage of incentives spent on purely loss leaders. This aligns with a push for fully sustainable incentive levels that are on track to be achieved within the next month.

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Thanks for having this accurate summary of the conversation in the group @JohnnyWyles !

Initially I believed that setting taker fees would hurt Osmosis as a protocol. However, time has shown that this belief was wrong and Osmosis is thriving ever sence.

In essence the 0.02% taker fee in combination with the swap fee is still competitive with fees found on centralized exchanges, especially on the Concentrated Liquidity pools. Making sure that what we do on the DEX either attracts traders and volume which spreads to other pools OR generates yield towards the protocol and its stakers is something which we must keep in mind. If we look to the “real world” that is essentially how normal companies also operate. In the end it must result in a sustainable business model and with the proposed steps I think we are on the good route to be a decent company with a competitive product.

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At Govmos we also support this feature. It is a viable solution to balance the cost-revenue ratio of the protocol.

It is important to understand that this 0,02% fee corresponds to the “20% of the base fee” category. More broadly, the sub-DAO has a mandate to allocate each pool with one of three types of fees:

  • Base Fee Tier (currently set by governance at 0,1%)
  • 20% of the base fee Tier (0,02%)
  • 0% fee (for pairs with certain criteria, like Identical Asset Pairs)

By this proposition the sub-DAO basically discusses a new framework in which each pair receiving incentives should not be granted the “0% fee” tier, only the reduced or full fee tiers to compensate for the incentives. We would be happy to have the community’s backing on this and would appreciate any user’s feedback and suggestions, if any.

Thanks for reading,
Govmos
pro-delegators-sign

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I’ve used the same analogy of Osmosis as a business. I’m a firm supporter of the taker fee in general as a powerful tool to generate sustainable revenue for stakers. It’s going to be a balancing act between yield for stakers, and pricing the service competitively to promote volume.

I support the adjustment of the taker fee in situations such as these where the increase in usability is worth the reduction in profitability.